VideoWhy the slow entry to market? Calculating EVA properly on old software and databases is no cinch. Rather than simply extracting information from the general ledger, software programs must massage the data to calculate net operating profit after tax, or NOPAT, and make at least a half-dozen adjustments that can include the capitalizing of research and development. Arriving at the appropriate cost of capital, after figuring out the amount of capital employed, may be equally tricky.
"None [of the vendors] is yet providing an effective way to provide the EVA data," says Al Ehrbar, senior vice president at Stern Stewart & Co., which markets the Economic Value Added version of economic profit. He maintains that the vendors are having trouble translating operating numbers into company-specific definitions of NOPAT and applying the appropriate capital charge, for one thing. Still, a number of vendors are angling to negotiate deals with Stern Stewart to be providers of EVA-related products, he says.
The problem of finding the right ways to generate accurate figures for a company has many solutions. These include manipulating the general ledger, drawing from activity-based-costing calculations, converting to cash-basis accounting, or creating a separate "shadow" ledger of economic-profit data. Lawson, for example, takes the shadow approach. Lawson clients get two clean sets of data, one for traditional reporting that regulators require, and one for management accounting.
If the "vaporware" of more-advanced solutions can turn into software, some firms think they may be able to give new power to the front lines. Team leaders in manufacturing would compare online the economic profit or cost of longer production runs and carrying extra inventory. Salespeople would calculate, by customer, the economic cost of discounts and generous sales terms. And product managers would tally the economic profit of each product.--B.B.
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